Politics|Senate Tax Plan Diverges From House Version, Highlighting Political Pressures

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Senate Tax Plan Diverges From House Version, Highlighting Political Pressures

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From left, Senator Orrin Hatch, the chairman of the Finance Committee, with Treasury Secretary Steven Mnuchin and Gary D. Cohn, the national economic adviser, gathered for a meeting on tax overhaul legislation at the Capitol on Thursday.CreditCreditTom Brenner/The New York Times

WASHINGTON — Senate Republicans outlined their vision on Thursday for overhauling the tax code, proposing a one-year delay in President Trump’s top priority of cutting the corporate tax rate while reinstating some prized tax breaks used by middle-class families.

The Senate bill differs significantly from the House version approved by the Ways and Means committee on Thursday: It would preserve some popular tax breaks, including ones for mortgage interest and medical expenses, and would maintain a bottom tax rate of 10 percent for lower earners. But it would also jettison the state and local tax deduction entirely and delay the enforcement of a 20 percent corporate tax rate until 2019, which could rankle the White House and mute the economic growth projections that Republicans are counting on to blunt the cost of the tax cuts.

The disparate bills show the competing pressures that Republican lawmakers are facing and the calculations that Senate and House leaders are making to ensure passage of the bills through their respective chambers. While both bills share the main priorities of cutting corporate and individual taxes, they diverge on matters of high political sensitivity, particularly for vulnerable House Republicans from high-tax states and for Senate Republicans concerned about adding to the federal budget deficit.

Senate staff members said their draft would require changes, likely major ones, to survive procedural rules that allow it to pass on a party-line vote. Those changes could include setting some of the tax cuts to expire after a period of years.

A retiring senator, Jeff Flake, Republican of Arizona, raised concerns that the legislation could add more to federal deficits. “I remain concerned over how the current tax reform proposals will grow the already staggering national debt,” Mr. Flake said, “by opting for short-term fixes while ignoring long-term problems for taxpayers and the economy.”

Senators Mike Lee, Republican of Utah, and Marco Rubio, Republican of Florida, said the bill did not go far enough in increasing the child tax credit, which rose to $1,650 per child in the Senate version, from $1,600 in the House bill, and would now be available to families making up to $1 million a year, a leap from a current income limit of $110,000. “The Senate is not going to pass a bill that isn’t clearly pro-family,” they said in a joint statement, “so we look forward to working with our colleagues to get there.”

Stocks tumbled on the news that the corporate rate cut may be delayed. The Standard & Poor’s 500-stock index fell 0.4 percent and the Nasdaq 100 slipped 0.5 percent.

“The Street definitely felt like there was some connection between tax policy and the market reaction, which was pretty severe,” said Les Funtleyder, a portfolio manager at E Squared Capital Management in New York.

FreedomWorks, a conservative advocacy group, called the Senate’s plan to delay the corporate tax cut “unacceptable.”

Still, several business groups and Republican leaders applauded the movement in both chambers. The influential National Federation of Independent Business, which represents small businesses and had opposed the House bill, reversed course and said it backed both an amended House bill and the Senate version. Other groups shook off the delayed rate cut and embraced the Senate plan.

“It’s been a week of remarkable progress,” said Michael A. Steel, a former House leadership aide who is a managing director for Hamilton Place Strategies, a consultancy in Washington.

Republican leaders expressed optimism that they could quickly address concerns and resolve the competing political pressures facing their lawmakers in the Senate and House.

“This will be met with Senate consternation and all kinds of things,” said Representative Peter Roskam of Illinois, who oversees the Ways and Means tax policy subcommittee. “But when it comes down to it, what we’re on the verge today is winning an argument — winning an argument about the future of our economy and what our worldview is.”

The bill set for introduction in the Senate Finance Committee includes seven income brackets, scuttling some of the simplicity that House drafters used to sell their bill, which reduced the number of brackets to four.

It would keep the bottom tax bracket for individuals at 10 percent, which the House had raised to 12 percent, and would reduce the top rate for high earners to 38.5 percent, down from the current rate of 39.6 percent, which the House had maintained. Like the House bill, the Senate’s version plans to roughly double the standard deduction and expand the child tax credit.

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Mitch McConnell, the Senate majority leader, at the Capitol on Thursday. Republican lawmakers unveiled their tax bill and hope to send it to President Trump’s desk by Christmas.CreditTom Brenner/The New York Times

The starkest example of the competing priorities is the state and local tax deduction, which is heavily used in high-tax states like New York, New Jersey and California, which are represented by Democrats in the Senate but have some Republican representatives in the House. The Senate completely eliminates the valuable tax break, which allows taxpayers to deduct state and local income, sales and property taxes. The House bill would still allow individuals to deduct property taxes up to $10,000.

Some House Republicans have already rejected that limitation as too strict and the Senate’s complete elimination could further spook those members, whose political future could be imperiled if they pass a plan that actually increases their constituents’ tax bills.

“Every state should be a winner in tax reform, and in my opinion, that would not be the case if the Senate view were to prevail,” said Representative Leonard Lance, Republican of New Jersey. “I’m not voting for the $10,000, so I’m certainly not voting for zero,” Mr. Lance said.

The bill would add $1.5 trillion to federal budget deficits over a decade, without accounting for additional economic growth it might spur, according to the Joint Committee on Taxation. But Senate staff members suggested that the Finance Committee would need to make changes to ensure it does not lose revenue after 10 years, and thus stays in compliance with the procedural rules that would allow the bill to pass on a party-line vote.

In another significant departure from the House bill, the Senate would not create a special, lower top rate for so-called pass-through entities, which are businesses whose profits are distributed to their owners and taxed as individual income. Instead, the Senate would create a 17.4 percent deduction on income taxes for pass-through owners of all income levels, effectively cutting rates both on rich owners and on middle-class small-business owners who would not have benefited from the House’s original lower pass-through rate. For service-providing pass-throughs, it would phase out that benefit for individuals with income above $75,000 and for married couples with income above $150,000.

On Thursday, in the face of pushback from fellow Republican lawmakers, small businesses and other industry groups, Representative Kevin Brady of Texas, who leads the Ways and Means Committee, unveiled a 29-page amendment making further revisions to the House’s tax plan. The amendment restores the adoption tax credit, which the House tax plan had planned to repeal. It also creates a new, lower tax rate for certain business owners.

Under the new provision, the first $37,500 of business income would be taxed at 9 percent, rather than 12 percent, for an unmarried individual earning less than $75,000 through a pass-through business. For a married couple, the dollar amounts would be double.

The Senate is also including a provision to prevent large multinational corporations from stashing profits overseas. The bill will propose a new business tax on American and foreign companies — effectively a minimum tax on their income earned in the United States — while also levying a 12.5 percent tax on income that American companies receive overseas from their intellectual property.

Preliminary estimates indicate the provision would raise more than $130 billion in tax revenue over 10 years to help offset revenue lost from rate cuts, committee staff members said. The original House approach, which would have levied a 20 percent “excise tax” on payments between American and foreign companies that are affiliated with each other, would have raised an estimated $155 billion in revenue.